Can Japanese stocks continue to outperform?

The Japanese stock market has pulled out of its long-running losing streak this year, holding up far better than most of its developed peers amid the fierce global sell-off this spring and joining the UK in the outperformers’ ranks for the past 12 months. This turnaround in fortunes begs the question: Can it persist?

One of the hottest topics across financial markets this year has been the historic depreciation of the yen against the dollar, which bottomed at 135.20 on June 13, the weakest level since October 1998. This trend has been underpinned by the starkly divergent paths between the two countries’ monetary policies, with the US Federal Reserve aggressively tightening to fight inflation while the Bank of Japan remains ultra-accommodative to stimulate economic growth. As shown below, yen weakness has closely tracked the widening gap between Japanese and US 10-year government bond yields.

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